The Pound Sterling (GBP) slipped below the critical support level of 1.2800 against the US Dollar (USD) during Thursday’s London session. The GBP/USD pair saw a sharp correction after a rally to nearly a three-month high of 1.2860, spurred by a cooler-than-expected US Consumer Price Index (CPI) report for May.
Cable Loses Gains as US Dollar Rebounds Post-Fed Projections
The Cable pared significant gains as the US Dollar rebounded following the Federal Reserve’s latest interest rate projections from their June meeting. The Fed indicated only one rate cut this year, contrary to the three cuts anticipated in March. This shift is attributed to a robust labor market and persistent price pressures in the first quarter of the year. Consequently, the US Dollar Index (DXY), which measures the Greenback’s value against six major currencies, recovered further to 104.80.
After maintaining interest rates within the 5.25%-5.50% range, Fed officials acknowledged slower-than-expected progress towards the 2% inflation target. The Fed also revised its forecast for the core Personal Consumption Expenditures (PCE) Price Index, the preferred inflation measure, to 2.8% for 2024, up from March’s estimate of 2.6%.
Investor Focus Shifts to US Producer Price Index Data
Investors are now eyeing the US Producer Price Index (PPI) data for May, set to be released at 12:30 GMT on Thursday. Expectations are that headline producer inflation will have risen to 2.5% year-over-year in May from 2.2% in April, with the core reading, excluding volatile food and energy prices, maintaining a steady growth of 2.4%.
Pound Sterling Performance Amid BoE Rate-Cut Speculation
Despite speculation of imminent rate cuts by the Bank of England (BoE), the Pound Sterling is performing robustly against most currencies, except the Euro. Market expectations for BoE rate cuts in August or September have increased following reports from the UK Office for National Statistics (ONS) indicating that economic recovery stalled as anticipated in April.
The UK economy remained stagnant in April, following a 0.4% expansion in March, suggesting a subdued start to the second quarter. The economic halt was due to a 0.9% growth in service output being offset by declines in manufacturing and construction activities, down by 0.9% and 1.4% respectively, indicating under-utilization of overall capacity amid a poor demand environment.
Additionally, April’s factory activity report revealed accelerated contractions in Manufacturing and Industrial Production, pointing to a slowing economic recovery. This slowdown has weakened the Conservative Party’s claims of economic turnaround, which was a key promise by Prime Minister Rishi Sunak.
The UK labor market has also seen layoffs over the past four months, with the unemployment rate rising to 4.4% in the three months ending in April. Wage growth, a measure of wage inflation contributing to service inflation, remains significantly high, hindering the return to the desired 2% inflation rate.
Looking ahead, investors will be focused on the BoE’s interest rate policy meeting scheduled for June 20. The BoE is expected to keep rates unchanged, but any guidance on the timing of potential rate cuts will be closely monitored.
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